March 23, 2016

4 Considerations for Mechanic's Liens on Alternative Energy Projects

Securing payment is critical for contractors, and contractors, subcontractors and suppliers often rely on their mechanic’s lien rights. However, on wind and solar electrical generation projects, unusual considerations can control whether and how much mechanic’s liens will benefit contractors or be a problem for owners and lenders.

A mechanic’s lien provides contractors, subcontractors, suppliers and other tradesmen with an important form of security for payment. While many contractors might presume that they are performing lienable work, a false presumption can be costly. A contractor’s lien rights may be impacted simply by the type, location, ownership, characterization or even scope of a project. As we know, all alternative energy projects are not created equal and may range from a single wind turbine to hundreds of acres of solar panels or miles of connected turbines. Participants in solar and wind projects should consider among other things the following issues regarding mechanic’s liens on alternative energy projects:

1. Limited Property Rights May Limit Lien Rights

The developers of wind and solar projects often do not own the underlying property. It is not uncommon for alternative energy projects to be constructed through limited rights created in an easement or lease agreement.

  • Owners should be aware that the law of many states might allow a mechanic’s lien to attach to the underlying ownership interest in the property where the project is constructed unless certain procedures are followed — such as posting notices on the property that the contractors can lien only the leasehold or easement interest of the project developer. Conversely, contractors need to understand that their mechanic’s lien might extend only to the leasehold or easement, and that such an interest might be subject to termination or have little value if the project is not completed.
  • If the lease or easement characterizes the completed project as being a non-permanent accession to the land (something the landowner may remove upon termination of the lease or easement), then an owner or lender might argue that the project is nothing more than an unlienable tenant improvement or other temporary fixture or improvement. If a court accepts this argument, the project could be treated as nothing more than removable personal property, something to which a mechanic’s lien ordinarily will not attach. Contractors might assume that a wind project consisting of numerous wind turbine structures, each with a million pounds or more of steel and concrete in large underground foundations connected with miles of buried cable that weighs several pounds per foot would never be considered to be easily removed temporary improvements just because someone labeled the project that way. Yet, such arguments are being presented to courts. The smaller the project, the easier it will be for an owner or lender to make such an argument.

2. Location, Location, Location

Typically mechanic’s liens must be filed in the county where the project is located. However, alternative energy projects are expansive and may extend over county or even state lines. When a contractor is not paid, where does it file a lien, and if it is filed in separate counties, does the contractor need to apportion the amount owed between or among the separate counties?

3. Unique Statutory Rules May Apply to Perfection of Liens

Mechanic’s liens are typically filed with county property records, but, a state might have special rules for certain types of energy projects. In Minnesota, for example, a lien for work on an electrical transmission line and its accoutrements must be filed with the secretary of state, not the county. A solar or wind project will have extensive cabling to collect and transmit the electricity generated by the project to a central substation, and often will include miles of additional transmission lines to carry that electricity to the main grid. Is such a project work on a transmission line and its accoutrements requiring that the lien be filed with the secretary of state? If so, does the lien also extend to the entire transmission line? Contractors, developers and lenders should review the applicable state’s lien laws to determine whether there are special statutes that could apply to electric projects and consider the possible effects on their projects.

4. All States Are Not Created Equal

Each state has its own set of laws for the creation, attachment and perfection of mechanic’s liens. Even if two states’ laws are the same or similar, courts may diverge in their interpretation of the laws. As a result of this diversity in lien law, it is imperative that contractors consult with attorneys to help guide them through the morass.

Lien law is constantly changing parallel to the creation of new forms of alternative energy. Notwithstanding this ever-changing environment, basic knowledge of the issues expressed in this article should help contractors develop a better understanding of their lien rights. Faegre Baker Daniels is a national law firm with many attorneys experienced in alternative energy projects.

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